EXCLUSIVE-U.S. opens taps, a bit, on re-exporting oil to Europe

(Updates with BIS saying the licenses are for re-exports, adds
background)

By Selam Gebrekidan

NEW YORK Feb 4 The U.S. government has
authorized limited re-exports of foreign crude to Europe, for
the first time in years, raising new questions about how
companies are testing the limits of controversial, decades-old
export constraints.

The Department of Commerce has granted two licenses to
export crude to the UK since last year and another two to Italy,
according to data Reuters obtained through a Freedom of
Information Act request.

One application for German exports was filed in January and
is awaiting a decision by the Bureau of Industry and Security
(BIS), which is responsible for reviewing requests to export
crude under a 1975 law that bans most shipments with a few
exceptions, including sales to Canada and re-exports.

On Tuesday, after Reuters reported on the existence of the
permits, a BIS official said they only covered re-export of
foreign oil and not domestically produced crude oil. He did not
say where the oil would come from.

The bureau earlier had not responded to repeated requests
for comment on whether the licenses were for the re-export of
foreign crude or swap deals for oil that had been produced in
the United States; both provisions are allowed within current
export regulations.

These are the first permits for shipments to the UK since
at least 2000 and the first to any European country since 2008,
according to data from the BIS. The bureau has approved 120
licenses since January 2013, nearly 90 percent of which were for
sales to Canada, the data show.

While the permits do not show that U.S. producers are moving
more of their oil overseas, the licenses could add to the
growing debate in Washington on the benefits and pitfalls of
lifting the ban, among the year's most urgent policy questions
as the relentless rise in shale oil production threatens to
saturate domestic refiners as soon as this year.

They may add to expectations that the Obama administration
will allow companies to use provisions in the existing
regulation to slowly increase exports, while stalling on a
decision on whether to scrap the ban.

Canadian oil sands producers have begun exploring ways to
increase exports of their deeply discounted crude, most of which
is now bound for the United States. Such re-exports would be
controversial among environmentalists who are seeking to stem
the growth in energy-intensive oil sands output.

They could also fuel critics of Canada's oil patch and the
Keystone XL pipeline, which some fear may allow for the United
States to be a conduit for growing oil sands production.
TransCanada has denied that its long-stalled pipeline
would be used to export Canadian crude.

RELIC

With U.S. oil production at a 25-year high, many oil
producers are eyeing other markets and have called for an end to
the ban on exports, which they consider a relic of the 1970s,
when the Arab oil embargo led to steep prices at the pump.

On the other side, independent U.S. refiners, which stand to
benefit from cheaper domestic crude, have argued against easing
restrictions.

Senator Ron Wyden, chairman of the Energy and Natural
Resources Committee and a Democrat of Oregon, warned at a
hearing last week that "a number of influential voices" that
want to export oil could drown out the risks for the average
consumer.

If more exports to Europe are allowed, refiners across the
Atlantic may have cause to celebrate since access to cheap,
high-quality U.S. shale oil would help revive their margins.

The BIS declined to comment on the identity of the exporting
companies, citing exceptions in the Export Administration Act.

The bureau's data does not show which permits were used, and
the Department of Energy's oil export data does not show any
crude shipments to Europe through November 2013.

EUROPEAN EXPORTS A RARITY

Exports of crude to Canada were initially approved by
President Ronald Reagan in the 1980s, and have picked up rapidly
in recent years. The United States sent about 200,000 barrels of
oil a day to Canada in November, the highest volume since 1999,
data from the Department of Energy shows.

A handful of licenses have also been regularly approved over
the past decade for countries in central America or Asia, either
for the export of heavy California crude or the re-export of
foreign-origin oil, according to a BIS statement released last
year.

But European countries have rarely appeared on the list. Two
permit applications filed in 2011 for exports to Switzerland and
one for exports to the Netherlands were not approved.

The two approved UK permits were for shipments with a total
maximum value of $1.8 billion, while those to Italy were valued
at $3.12 billion. The application for German exports was worth
$2.6 billion, the data show.

PRESSURE FOR SWAPS

The licenses for re-exports may add to pressure among North
American producers to allow for oil volume swaps, by which
companies can export in return for a higher quality or volume of
crude or refined fuel.

"The implication is that we are not exchanging a higher
value item for a lower value," said Ed Morse, global head of
commodity research at Citi, while noting that re-exports of
Canadian heavy oil from U.S. shores are on the rise.

Applicants for such licenses have to demonstrate that the
trade is part of an overall transaction in the nation's interest
and the oil cannot be sold for a reasonable price in the United
States.

Sellers also have to prove that exports will be terminated
if U.S. supplies are seriously threatened.

Theodore Kassinger, a partner with the law firm O'Melveny
and Myers in Washington who previously served as the deputy
secretary and general counsel of the Department of Commerce,
said it is difficult for sellers to prove that they cannot sell
the oil at a profit within the United States.

"But the time will not be very far when it will not be
commercially viable to market the crude in the country," he
said.

Without established trade routes or tanker rates, it is
difficult to compare the economics of exporting Canadian heavy
oil sands versus shipments of U.S. light-sweet oil to Europe.
Few traders have examined the value of such unprecedented
shipments.

While Canadian crude trades at deep discounts to the U.S.
benchmark futures contract, most European refiners are
not configured to process the heavy oil.

Ultra light, low-sulfur Bakken, on the other hand, would be
welcome in Europe, but trades at relatively higher prices in the
United States where local refiners are still eager to replace
imported crude with the domestic grade.
(Reporting by Selam Gebrekidan; Editing by Jonathan Leff and
Leslie Adler)

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